Fuel price optics: Excise duty cut on petrol, diesel

The Center finally decided to bow down and act on the advice of monetary policy makers last week Excise duty cut by ₹5 and ₹10 per liter respectively on petrol and diesel. The duty reduction announced on the eve of Diwali immediately helped bring down the retail prices of both the fuels by at least 5% and 11% respectively. And on the request of the government, more than 20 states and union territories also Reduced VAT on fuel products, thereby providing relief to consumers from record pump prices. While the Center insisted that the decision was to give impetus to the revived economy as well as ease inflationary pressures, political significance of its time It was hard to ignore what came a day after the regime BJP suffered electoral defeats in some legislative and parliamentary by-elections. That the government was keen to reduce political capital by delaying the levy became clear two days later, when it sought to exclude states – almost all governed by opposition parties – that have yet to cut VAT. Were. With crucial state elections, including the prized UP assembly, due early next year, the BJP is eager to regain control of the narrative, especially given rising public concern over inflation and rising fuel prices.

As far as the economy is concerned, reduction in fuel bills is sure to have a beneficial effect on inflation as diesel is the main fuel for freight movement and affects the cost of everything needed for transportation. The moderation in transportation costs should provide some respite to the manufacturing sector, which has suffered from rising input prices at a time when demand is still weak. The extra cash left in consumers’ wallets could also provide a small jump in consumption, although the durability of this stimulus will depend on how global oil prices behave in the coming weeks and months. Global oil prices have boiled over this year and the World Bank Group last month estimated that average crude oil prices would end 2021 with a gain of around 70%. The Indian crude oil basket has risen an average of about 62% in the 10 months through October and the historical trend suggests a firming in prices towards the end of the year when the northern hemisphere winter typically drives up energy demand, a real risk. That the Indian refiners are left with no option but to continue increasing the retail prices. After this again it will be the responsibility of the Center to further cut the fee raised last year. States run by other parties should take inspiration from Tamil Nadu and Punjab and reduce prices at shops, and not back down for political or revenue reasons.